the role of stock market development on economic growth in

Copyright © IAARR 2012: www.afrrevjo.net 51 Indexed African Journals Online: www.ajol.info

An International Multidisciplinary Journal, Ethiopia

Vol. 6 (1), Serial No. 24, January, 2012

ISSN 1994-9057 (Print) ISSN 2070--0083 (Online)

DOI: http://dx.doi.org/10.4314/afrrev.v6i1.5

The Role of Stock Market Development on Economic

Growth in Nigeria: A Time Series Analysis

(Pp. 51-70)

Alajekwu, Udoka Bernard - Department of Banking and Finance,

Anambra State University, P. M. B. 02, Uli, Nigeria

E-mail: [email protected]

Tel: +2347030997856

Achugbu, Austin A. - Department of Banking and Finance, Anambra

State University, P. M. B. 02, Uli, Nigeria.

E-mail: [email protected]

Tel: +2348036680049

Abstract

This study investigated the role of stock market development on economic

growth of Nigeria using a 15-year time series data from 1994 - 2008. The

method of analysis used is Ordinary Least Square (OLS) techniques. The

study measures the relationship between stock market development indices

and economic growth. The stock market capitalization ratio was used as a

proxy for market size while value traded ratio and turnover ratio were used

as proxy for market liquidity. The results show that market capitalization and

value traded ratios have a very weak negative correlation with economic

growth while turnover ratio has a very strong positive correlation with

economic growth. Also, stock market capitalization has a strong positive

correlation with stock turnover ratio. This result implies that liquidity has

http://dx.doi.org/10.4314/afrrev.v6i1.5


propensity to spur economic growth in Nigeria and that market

capitalization influences market liquidity. We should view with caution the

notion that stock market size is not significant for economic growth since

multicollinearity exists in the data used for this analysis. The government

should make policies that boost the interest of domestic investors in Nigeria

as this might spur investors’ interest and boost stock market activity.

Keywords: Stock Market Development, Economic Growth, Time Series

Analysis, Nigeria, Market capitalisation, liquidity.

Introduction

Traditional theorists believed that financial market in general has no

correlation with economic growth. This proposition aroused studies on

finding the effect of financial market on growth. Ample of studies have

debunked the traditionalists and established association between stock market

and economic growth.

In a developing economy like Nigeria, the development and growth of stock

markets have been widespread in recent times. Despite the size and illiquid

nature of stock market, its continued existence and development could have

important implications for economic activity. For instance, Pardy (1992) has

noted that even in less developed countries capital markets are able to

mobilize domestic savings and able to allocate funds more efficiently. Thus

stock markets can play a role in inducing economic growth in less developed

country like Nigeria by channeling investment where it is needed from

public. Mobilization of such resources to various sectors certainly helps in

economic development and growth. Stock market development has assumed

a developmental role in global economics and finance because of their impact

they have exerted in corporate finance and economic activity.

Ample of studies in Nigeria investigated the role of stock market

development on economic growth. Most of the studies noted that Nigerian

stock market spur economic growth (Olofin and Afangideh, 2008; Ezeoha,

Ogamba and Onyiuke, 2009 and Ogunmuyiwa, 2010). These studies in

Nigeria found positive impact from stock market development to economic

growth; this study is prompted by opposing studies witnessed in South Africa

(Odhiambo, 2009 and Ndako, 2009). Odhiambo (2009) says that stock

market development Granger-cause economic growth, Ndako (2009) says the

direct opposite: economic growth Granger-cause stock market development;

all in same country, with similar time series data. Also, a very recent study by

Vol. 6 (1) Serial No. 24, January, 2012. Pp. 51-70


Ake and Ognaligui (2010) posited that Douala Stock Exchange does not

affect Cameroonian economic growth.

On the strength of the above, this study attempts to dig out the empirical

evidence in the context of Nigeria regarding the role of stock market

development on economic growth. Specifically, this paper investigates the

role of stock market size and liquidity on economic growth.

These objectives are tested with the following hypotheses:

1. Ho: There is no significant relationship between stock market size

and economic growth.

2. Ho: There is no significant relationship between stock market

liquidity and economic growth.

The remaining portion of this paper is treated as follows: section two is

review of empirical work, section three is methodology, section four is the

result and discussion while section five is the conclusion and

recommendations.

Review of empirical work

A good number of studies have been done on the roles of stock market

development and economic growth some of which produced conflicting

findings. Tuncer and Alovsat (2001) examined stock market-growth nexus

and found a positive casual correlation between stock market development

and economic activities. Chen and Wong (2004) elaborated that the nexus

between stock returns and output growth and the rate of stock returns is a

leading indicator of output growth. According to Agarwal (2001) the study

of stock market development and economic growth in African countries

suggested a positive relationship between several indicators of the stock

market performance and economic growth. This study was expanded by

Mohtadi and Agarwal (2001) that covers 21 emerging markets over 21 years

and found in addition that this relationship exists both directly as well as

indirectly by boosting private investment behaviour. The studies then lend

support to the financial intermediation literature as well as to the traditional

growth literature.

In Nigeria, Osinubi (2001), ventured into knowing whether ―stock market

promotes economic growth‖. The study employed the least square regression

using data from 1980 – 2000. The result established positive link between

economic growth and stock market development and suggest the pursuit of

The Role of Stock Market Development on Economic Growth in Nigeria...


policies geared towards rapid development of the stock market. Udegbunam

(2002) noted that Nigerian economy is moving towards increased

liberalization, greater openness and greater financial development. He then

studied the implications of these developments for industrial growth in

Nigeria using simple model which relates industrial output growth to

openness, stock market development and some control variables. The study

suggests that openness to world trade and stock market development are

among the key determinants of industrial output growth in Nigeria.

In the other hand, a study in Germany found that stock market volatility has a

significant and negative impact on growth (Arestis, Demetriades and Luintel,

2001).

Mishkin (2001) and Caporale and Soliman (2004) provided the evidence that

an organized and managed stock market stimulate investment opportunities

by recognizing and financing productive projects that lead to economic

activity, mobilize domestic savings, allocate capital proficiency, help to

diversify risks, and facilitate exchange of goods and services. Undoubtedly,

stock markets are expected to increase economic growth by increasing the

liquidity of financial assets, make global and domestic risk diversification

possible, promote wiser investment decisions, and influence corporate

governance that is, solving institutional problems by increasing shareholders‘

interest value. Bell and Rousseau (2001) evaluated the relationship between

individual macroeconomic indicators and measures of financial development

in India and revealed that the financial sector has been instrumental in

promoting economic performance.

The study finds that the stock market and economic growth both may be able

to promote growth, with the impact of the banking system being stronger.

With well-functional financial sector or banking sector, stock markets can

give a big boost to economic development (Rousseau and Wachtel, 2000;

Beck and Levine, 2003).

Capasso (2003) provide further insight into the linkages between stock

market development and economic growth within the context of a dynamic

general equilibrium framework of informational asymmetries, endogenous

contract choice and capital accumulation. The findings contend that stock

market activity is closely related to real activity, with firms having a greater

preference towards issuing equity (rather than debt) as capital accumulation

proceeds.



Efficient stock markets provided guidelines to keep appropriate monetary

policy through the issuance and repurchase of government securities in the

liquid market, which is an important step towards financial liberalization.

Similarly, well-organized and active stock markets could modify the pattern

of demand for money, and would help create liquidity that eventually

enhances economic growth (Caporale and Soliman, 2004). Similarly,

Siliverstovs and Duong (2006) revealed that the accounting for expectations

has represented by the economic sentiment indicator in which stock market

has certain predictive content for the real economic activity.

Levine (2003) shed some empirical light on the ambiguous predictions about

the relationship between stock market liquidity and economic growth. The

paper presents cross-country evidence on the association between one

measure of stock market liquidity – the total value of stock transactions

divided by GDP – and average economic growth rates over the period 1976 –

1993. The data suggest that there is a strong positive relationship exists

between long-run economic growth rates and stock market liquidity. This

positive relationship is found to be robust even to various changes in the

containing information set.

Chen, Roll and Ross (2004) test whether innovations in macroeconomic

variables are risks that are rewarded in the stock market. Financial theory

suggests that the following macroeconomic variables should systematically

affect stock market returns: the spread between long and short interest rates,

expected and unexpected inflation, industrial production, and the spread

between high- and low-grade bonds. They found these sources of risk are

significantly priced. They also found that neither the market portfolio nor

aggregate consumption is priced separately.

The study of Azarmi, Lazar and Jeyapaul (2005) tend to suggest that

relevance of stock market development to economic growth is a function of

economic policies prevalent in the economy of study. They examined the

empirical association between stock market development and economic

growth for a period of ten years around the Indian market ―liberalization‖

event (1981 – 2001). Their primary object of the study is to know whether

Indian stock market is a casino or not. The study revealed: Indian stock

market development is not associated with economic growth for period 1981

– 2001; relevance of stock market to economic growth during the pre-

liberalization era; negative correlation between stock market development

and economic growth for the post-liberalization era; Indian stock market is a



casino for the sub-period of post liberalization and for the entire ten-year

event study period. In particular their study result is consistent with the

suggestion that the Indian stock market is a casino for the sub-period of post-

liberalization and for the entire ten-year study period.

The study by Niewerburgh, Buelens and Cuyvers (2005) investigated the

long term relationship between financial market development and economic

development in Belgium. They employed stock market indicators from 1873

– 1935 and found that Institutional changes affecting the stock market

explain the time-varying nature of the link between stock market

development and economic growth. This credited the finding by Azarmi,

Lazar and Jeyapaul (2005) that economic policies in vogue influence the

relevance of stock market indicators on economic growth.

Adjasi and Biekpe (2005) found a significant positive impact of stock market

development on economic growth in countries classified as upper middle-

income economies. Bahadur and Neupane (2006) concluded that stock

market fluctuations help in the prediction of the future growth of an

economy.

Osei (2006) investigates both the long run and the short run relationships

between the Ghana stock market and macroeconomic variables. The study

establishes that there is cointegration between the macroeconomic variables

and Ghana stock market. The results of the short run dynamic analysis and

the evidence of cointegration mean that there are both short run and long run

relationships between the macroeconomic variables and the index. In terms

of Efficient Market Hypothesis (EMH), the study establishes that the Ghana

stock market is informationally inefficient particularly with respect to

inflation, treasury bill rate and world gold price.

Hasan, Wachtel and Zhou (2007) posited that profound changes have

occurred in both the Chinese political and economic institutions over the

years. They believed the pace of transition has led to variation across the

country in the level of development. They then used panel data for the

Chinese provinces to study the role of legal institutions, financial deepening

and political pluralism on growth rates. The study uses regression models to

explain provincial GDP growth rates. The study found that the development

of financial markets, legal environment, awareness of property rights and

political pluralism are associated with stronger growth.



Yartey and Adjasi (2007) studied critical issues and challenges of stock

market development in Sub-Saharan Africa and found that stock markets

have contributed to the financing of the growth of large corporations in

certain African countries. The study found inconclusive evidence on the

impact of stock markets on economic growth in African countries, but

acknowledged that the stock market value traded seems to be positively and

significantly associated with growth.

Olofin and Afangideh (2008) investigated the role of financial structure in

economic development in Nigeria using aggregate annual data from 1970 to

2005. The study developed a small macroeconomic model to capture the

interrelationships among aggregate bank credit activities, investment

behavior and economic growth given financial structure of the economy. The

study holds that a developed financial structure has no independent effect on

output growth through bank credit and investment activities, but financial

sector development merely allows these activities to positively respond to

growth in output.

Most of the studies so far revealed focuses on relationships; studies from

2008 found a new question of concern to policy makers. The issue of causal

effect of stock-growth nexus emanates here, though previous researches are

not totally in agreement as to the relationship of stock market development in

particular, and the general financial market with economic growth.

Brasoveanu, Dragota, Catarama and Semenescu (2008) examine the

correlation between capital markets development and economic growth in

Romania using regression function and VAR models. The study revealed that

capital market development is positively correlated with economic growth,

with feed-back effect, but strongest link is from economic growth to capital

market suggesting that financial development follows economic growth,

economic growth determining financial institutions to change and develop.

In the work of Riman, Esso and Eyo (2008), they posed a big question as to

whether there really is a link between stock market performance and

economic growth in Nigeria, or are the stock market liquidity just highly

correlated with some exogenous non-financial factors? Findings suggest that

long run relationship exist between stock market and economic growth. The

study identified a uni-directional causality that runs from stock market to

economic growth but suggest that caution should be exercised in interpreting

this uni-directional causality since other non-financial exogenous variables



such as have been identified to influence the direction of stock market

development in Nigeria.

In the year 2009, stock-growth nexus received much research concern from

Nigerian academics. Their studies view the stock-growth concern from

varying aspect and do not have unifying research findings in Nigeria

regarding stock market development and economic growth. The work of

Ezeoha, Ogamba and Onyiuke (2009) was designed primarily to examine the

nature of relationship existing between stock market development and the

level of investment flows in a country with a high degree of macroeconomic

instability; and whether the stock market plays a uniform role in attracting

both domestic and foreign investments in such economic situation. The

study shows that development in the Nigerian stock market over the years

was able to spur growth in domestic private investment flows, but unable to

do so in the case of foreign private investment; and that development in the

country‘s banking system rather had some destabilizing effects on the flows

of private investments. This study, according to the researcher, is among its

kind to have empirically sort for and established some discriminate effects of

stock market development in the flows of domestic and foreign private

investment. This study tries to link the relationship among the variables to

spur economic growth with stock market development. Maku and Atanda

(2009) further study these variables by posing a big research question: do

macroeconomic indicators exert shock on the Nigerian capital market? This

question aided them to examine the long-run and short-run effect of

macroeconomic variables on the Nigerian capital market between 1984 and

2007. The Augmented Engle-Granger cointegration test they conducted

revealed that macroeconomic variables exert significant long-run effect on

stock market performance in Nigeria. Also, the employed Error Correction

Model showed that macroeconomic variable exert significant short-run shock

on stock prices as a result of the stochastic error term mechanism. However,

the empirical analysis showed that the NSE all share index is more

responsive to changes in exchange rate, money supply and real output. In a

nutshell, the study believed that macroeconomic indicators have

simultaneous significant impact on the Nigerian capital market both in the

short and long-run. Adam and Tweneboah (2009) from Ghana disagreed with

Ezeoha, Ogamba and Onyiuke (2009) on the impact of Foreign Direct

Investment (or Private Foreign Investment) on stock market development.

Adam and Tweneboah (2009) found that there is a long-run relationship

between FDI, nominal exchange rate and stock market development in



Ghana. They posited that a shock to FDI significantly influences the

development of stock market in Ghana.

Ewah, Esang and Bassey (2009) appraised the impact of capital market

efficiency on economic growth in Nigeria, using time series data on

capitalization, money supply, interest rate, total transaction and government

development stock that ranges between 1961 to 2004. The result of the study

shows that the capital market in Nigeria has the potential of growth inducing,

but it has not contributed meaningfully to the economic growth of Nigeria.

The study attributed the findings to the low market capitalization, low

absorptive capitalization, illiquidity, misappropriation of funds among others.

The study believed and suggested capital market remains one of the

mainstreams in every economy that has the power to influence economic

growth, hence it advised the organized private sector to invest in the capital

market.

The most recent research by a Nigerian (Ogunmuyiwa (2010)) on stock-

growth nexus investigated the relationship as well as the channel through

which investor‘s sentiment and liquidity affect growth. The study used time

series data covering 1984 to 2005 in its investigation. The study found that

both investor‘s sentiment and stock market liquidity Granger-cause economic

growth in Nigeria.

Nowbutsing (2009) also examined the impact of stock market development

on growth in Mauritius and found Stock market development positively

affects economic growth in Mauritius in the short run and long run. This

contribution agreed that stock market development spurs economic growth.

A study from Goaied and Sassi (2010) conducted using an unbalanced panel

data fro 16 MENA region countries showed that there is no significant

relationship between banking and growth which reinforced the idea that

banks doesn‘t spur economic growth.

Tachiwou (2010) studied the impact of stock market development on growth

using the regional stock exchange of the West African Sub-region (Bourse

Régionale des Valeurs Mobilières or BRVM) and found that stock market

development positively affects economic growth in West African monetary

union both in short and long run.

The causality effect that become a research concern with the study of Levine

and Zervos (1998) and (1996) which gained popularity in 2000s started to

received varying dimension of late. The issue of level and direction of



causality has remained vague and inconclusive as researchers give opposing

findings on the subject. Odhiambo (2009) studied the Stock market

development and economic growth in South Africa using ARDL-Bounds

Testing procedure from 1971 – 2007 and found a causal flow from stock

market development to economic growth in short run and long run. In the

same country Ndako (2009) used similar time series data (quarterly: 1983:q1

– 2007:q4) to examine causal relationship between stock market, banks and

economic growth in South Africa both found opposing result. Ndako (2009)

focused on stock market, banks and economic growth and concluded that

long-run bi-directional causality exists between financial development and

economic growth in the banking system; but unidirectional causality is seen

from economic growth to stock market system in long-run. While Odhiambo

(2009) says that stock market development Granger-cause economic, Ndako

(2009) says the direct opposite: economic growth Granger-cause stock

market development; all in same country, with similar time series data. Could

it be that Vector Error Correction Model (VECM) used by Ndako (2009)

gives opposing result from that given by research done with autoregressive

distributed lag (ARDL) bounds test which Odhiambo (2009) adopted? More

researches in South Africa would be of help to academics and policy-makers

alike.

Another study conducted by Vazakidis and Adamopoulos (2009) with

VECM in France support Ndako (2009) even in similar time series (1965 –

2007). Ake and Ognaligui (2010) took a different dimension and disagreed

at first hand with the issue of causality. His study investigated causality

relationship between stock market and economic growth in Cameroun with

time series data from 2006 to 2010 and found that Douala Stock Exchange

does not affect Cameroonian economic growth.

Methodology

Model specification

This study is based on the null hypothesis that there is no significant

relationship between stock market development and economic growth in

Nigeria. This hypothesis may be written as follows:

H0: Growth ≠ Stock ……………………………………………… (1)

Where Growth is the time series of real capita GDP for a given relevant

period and Stock is a proxy for stock market development over the same

period.



Stock market development can be measured by three basic traditional

characteristics (Inanga and Emenuga, 1997). This includes stock market size

measured by stock market capitalization and stock market liquidity measured

by total value traded ratio and turnover ratio.

A common index often used, as a measure of stock market size is the market

capitalization. Market capitalization equals the total value of all listed shares.

In terms of economic significance, the assumption is that market size and the

ability to mobilize capital and diversify risk are positively correlated.

Liquidity is used to refer to the ability of investors to buy and sell securities

easily. It is an important indicator of stock market development because it

signifies how the market helped in improving the allocation of capital and

thus enhancing the prospects of long-term economic growth. This is possible

through the ability of the investors to quickly and cheaply alter their portfolio

thereby reducing the riskiness of their investment and facilitating investments

in projects that are more profitable though with a long gestation period. Two

main indices are often used in the performance and rating of the stock

market: total value traded ratio; and turnover ratio.

Total value traded ratio measures the organized trading of equities as a share

of the national output. Turnover ratio is used as an index of comparison for

market liquidity rating and level of transaction costs. This ratio equals the

total value of shares traded on the stock market divided by market

capitalization. It is also a measure of the value of securities transactions

relative to the size of the securities market.

Therefore, the equation for this study is:

GDPt = α0 + β1MCRt + β2VTRt + β3TORt + Ut …………………(2)

where GDPt is the Gross Domestic Product at 1990 factor cost over the time

period. MCR is the stock market capitalization ratio over the time period,

VTR is the value traded ratio of domestic stock over the time period, TOR is

the turnover ratio over the time period, α and β are unknown parameters to be

estimated while Ut is the error term.

Data

The data used for this study is collected from Nigerian Stock Exchange

Annual Reports and Accounts, Various years; Securities and Exchange

Commission Annual Reports and Accounts; Central Bank of Nigeria

Statistical Bulletin and the National Bureau of Statistics.



Tools of analysis

The study adopts correlation and regression analysis to explore the nature of

relationships and implicit direction of the causation between dependent and

independent variables of this study. Correlation coefficient is the square root

of coefficient of determination R2. Since the coefficient of determination

varies between 0.0 and 1.0, it follows that the correlation coefficient must

vary between +1 and -1. Both the correlation coefficient and the coefficient

of determination have nothing to say about causation. However, in regression

analysis, the direction of the relationship between variables is made at the

outset, thus the causality is assumed rather than inferred from the model. This

paper chooses a correlation coefficient 0.50 as a benchmark for the

relationship between different variables.

Results and discussion

One of the aims of this study is to explore the nature of relationships (if any)

between the GDP and stock market development indexes, and between stock

market development indices themselves. From Table 2, the correlations are

as follows: GDP and Stock Market Capitalization ratio = -0.333; GDP and

Value Traded ratio = -0.125; and GDP and Turnover ratio = 0.907. This

shows that stock market capitalization and value of shares traded in the

Nigerian stock exchange has negative relationship with the Gross Domestic

Product at factor cost in Nigeria. This negative correlation is a very weak

one. This means that increased GDP is expected to cause a decreased in

market capitalization and value traded of shares on the Nigerian stock

exchange. Since the significant (1-tailed) value is above the 0.05 significant

levels (see Table 3), we can conclude that the suggestion that stock market

capitalization and value traded are negatively correlated with GDP is not

statistically significant and should not be taken serious.

On the other hand, the value of 0.907 shown for turnover ratio means that

there is a very strong relationship between GDP and turnover ratio. This

value is statistically significant at 0.01 level of significance which is below

the 0.05 level bench marked for this test (see Sig. 1-tailed).

Likewise, the correlation between stock market development indexes shows:

stock market capitalization and value traded = 0.966; stock market

capitalization and turnover ratio = -0.213; and value traded and turnover ratio

= -0.031. This shows that stock market capitalization and value traded have a

very strong correlation which is statistically significant at 0.01 below the

bench market of 0.05 level. On the contrary, the negative correlation shown



between stock market capitalization and turnover ratio; and turnover and

value traded are not statistically significant and should not be taken serious.

In a nutshell, this study establishes two statistically significant relationships:

a strong positive relationship between GDP and turnover ratio, and a strong

positive relationship between stock market capitalization ratio and value

traded ratio.

From Table 1, we form the equation of the relationship thus:

GDP = 426125 -1983MCR + 19866VTR + 11464TOR

(34180) (726) (7963) (2417)

Adjusted R-Squared (Adj R2) = .873

F-test0.5 = 33.115 (.0001) < Ftab = 27.2

Durbin-Watson (DW) = 1.607

To explain the authenticity of these relationships, we consider the coefficient

of determination (r2). This statistic is used to show the extent to which

variation in economic growth is explained by stock market development

indices. Since the sample for this study is small (15-year annual time series),

we use the adjusted r2 to avoid optimistic overestimation of the true value in

the population (Pallant, 2001). The value of the Adj r2 is .873. This suggests

that 87% of the variations in GDP are explained by stock market

development index (turnover ratio). The F-statistic shows that the value is

statistically significant at value below 0.5 significant level.

The presence of autocorrelation violates the ordinary least squares (OLS)

assumption that the error terms are uncorrelated. While it does not bias the

OLS coefficient estimates, the standard errors tend to be underestimated (and

the t-scores overestimated) when the autocorrelations of the errors at low lags

are positive. The Durbin–Watson statistic is a test statistic used to detect the

presence of autocorrelation in the residuals from a regression analysis. Since

the DW is equal to or approximate to 2, we say that the variables do no auto

correlate and therefore the results are reliable.

Also we perform a ―collinearity diagnostics‖ as a means for testing the

multicollinearity of the independent variables. We used the column labelled

Tolerance in Table 2 to for this. If this value is very low (near 0), then this

indicates the multiple correlation with other variables is high, suggesting the

possibility of multicollinearity (Pallant, 2001). In this study, the values in the



Tolerance are 0.033, 0.34 and 0.495 for stock market capitalization ratio,

value traded ratio and turnover ratio respectively. They suggest the presence

of multicollinearity.

To determine the individual contributions of the stock market indices to GDP

growth, look at Table 2. Ignoring the signs of the values, the column labelled

Beta shows that stock market capitalization has the highest contribution

(1.43) followed by value traded (1.28) and the least is turnover (0.64). The

column labelled sig. tests the statistical significance of the individual

contributions of the variables. The contribution of stock market capitalization

is significant at 2% level of significance; value traded at 3%. This means that

the contributions of stock market capitalization and value traded ratios are

not statistically significant in this study. However, the significance value for

turnover is 0.1% which is below the 5% level of significance bench mark for

this study. The study therefore concludes that, of the stock market indices

tested, only the stock market turnover statistically significantly contributes to

the growth of the GDP in Nigeria.

The regression analysis is expected to suggest the direction of causality in

this study. The derived equation (GDP = 426125 -1983MCR + 19866VTR +

11464TOR) shows that there is positive relationship between GDP and

liquidity (VTR and TOR). The constant (426125) means that other factors

which affect GDP have aggregate positive relationship with GDP. Market

capitalization ratio shows negative relationship with GDP. This implies that

liquidity causes economic growth while capitalization is caused by economic

growth.

The study suggests that increased market capitalisation (as proxy for stock

market size) could spur increased trading in stock (which is a proxy for

liquidity). Also, stock turnover ratio (as a proxy for liquidity) could influence

economic growth. This follows that stock market size influences market

liquidity which in turn influences economic growth in Nigeria.

Conclusion

This paper examined the role of stock market development on economic

growth using time series data from 1994 to 2008. The Ordinary Least Square

technique was used to assess the correlation between stock market

development and economic growth, and between stock market indexes. The

results show that stock market turnover ratio (a proxy for liquidity) has a very

strong relationship with economic growth while stock market capitalization

ratio (a proxy for stock market size) gives very weak negative correlation



which is not statistically significant. On that note, we establish that liquidity

is significant for economic growth but does not establish same for stock

market size. We should view with caution the notion that stock market size is

not significant for economic growth since multicollinearity exists in the data

used for this analysis. According to Ogunmuyiwa (2010) liquidity represents

investors‘ sentiment which is necessary to boost activities in a stock market

and facilitate economic growth.

Recommendations

This paper reiterates the recommendation of Ogunmuyiwa (2010) that the

policy makers and opinion formers should gear efforts towards fine-tuning

the indices that can result in long term pessimism in the stock market like

unpaid dividend, delay in dividend payments and transfer of stocks. This is

pertinent to encourage and ‗cajole‘ greater population of the income citizenry

into investing in the stock market. This way, activities in the market will

grow, capital accumulation increased and national productively may

improved accordingly.

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Table 1: Correlation Matrix

GDP MCR VTR

GDP 1

MCR -.333 (.112) 1

VTR -.125 (.328) .966**

(.000) 1

TOR .907**

(.000) -.213 (.223) -.031 (.456)

**. Correlation is significant at the 0.01 level (1-tailed).

NB: Values in parenthesis represent T-value

Table 2: Measure of Individual Contributions and Collinearity

Model

Unstandardized

Coefficients

Standardized

Coefficients

Collinearity

Statistics

B Std. Error Beta t Sig Tolerance VIF

(Constant) 426125.297 34179.644 12.46

7 .000

Stock Market

Capitalisation Ratio

-1983.119 726.160

-1.437 -2.731 .020 .033 30.531

Value Traded

Ratio

19865.498 7962.938 1.283 2.495 .030 .034 29.179

Turnover

Ratio

11463.873 2416.902 .642 4.743 .001 .495 2.020

a. Dependent Variable: GDP at 1990 factor cost


http://www.imf.org/external/pubs/ft/wp/2007/wp07209.pdf

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